ARNA was targeted for a bullish option play

It's been a tumultuous week for the shares of Arena Pharmaceuticals, Inc. (NASDAQ:ARNA - 10.23), with the stock exploring a 3-point range and tagging a four-year peak of $13.50. In fact, for the second day in a row on Thursday, ARNA saw notable action in the options pits, with one speculator employing both calls and puts to simulate stock ownership.

During the course of the session, ARNA saw roughly 124,000 calls and 71,000 puts change hands, far surpassing its average daily volume of about 68,000 calls and 27,000 puts. In early trading, symmetrical blocks of several thousand contracts traded at the August 9 put and August 14 call, both marked "spread." The 9-strike puts crossed for the bid price of $0.65, suggesting they were sold, while the 14-strike calls traded for the ask price of $0.51, implying they were likely bought. Plus, open interest soared at both back-month strikes overnight, indicating the initiation of a split-strike synthetic long stock strategy.

Instead of buying ARNA shares for about $10-$11.50 apiece yesterday, the trader bought the 14-strike calls. Then, to fund the cost of his bullish trade, he sold the 9-strike puts, collecting a net credit of $0.14 per pair of options. As such, the speculator can retain that premium as long as ARNA remains north of the $9 level through August options expiration -- giving him a clear edge over the ARNA shareholder and the "vanilla" call buyer.

Like the shareholder, though, the options trader's main goal is for ARNA to rally. Specifically, his profit will increase with each step north of $14, which would place the 14-strike calls in the money. However, while selling the puts paid for his optimistic position, the speculator's losses will now increase with each step south of $9, which would place the puts in the money.

After touching a multi-year peak of $13.50 on Wednesday, ARNA pared some of its gains yesterday, ending at $10.23. Nevertheless, the stock maintained its foothold atop its 10-day moving average, which -- along with its 20-day counterpart -- has ushered ARNA higher since before its bullish gap in mid-May.